Are you appointed as a (statutory) director of a Dutch B.V. (‘besloten vennootschap’) then it is crucial to understand the rights, responsibilities, and the potential risks involved.
In this blog, we discuss the essentials.
1. What are the rights of a statutory director of a B.V. in the Netherlands?
The most important right of a statutory director is the right to represent the company. First it is necessary to distinguish the role of directors from the role of shareholders.
The difference between a shareholder and a director
A private company with limited liability (in Dutch: B.V.) is owned by the shareholders. However, the shareholders are not involved in the day-to-day management of the company. By Dutch law the day-to-day management of the company is assigned to the board of directors. The shareholders appoint directors and are authorized to dismiss directors.
A statutory director is authorized to represent the company: the authorization to represent the company is unlimited and unconditional, unless otherwise provided by law.
The authorization to represent the company can for example be limited in the articles of association, for example by arranging that the directors are only authorized to represent the company jointly. The articles of association can also limit the representation authority by arranging that approval of the shareholders is required for certain kinds of resolutions.
If such a limitation can be traced back to a legal provision and is registered in the trade register, the limitation has external effect. A limitation that cannot be traced back only has internal effect, which means that the company is only internally bound by the agreement. In practice, this means that the company is not bound by an agreement if a director acted outside their authority, when it was not clear through the trade register that this director was not authorized to represent the company. The shareholders are authorized to change the articles of association, and therefore the shareholders hold the power of limiting the representation authority of the board of directors.
2. What are the responsibilities of a statutory director of a B.V. in the Netherlands?
Apart from gaining the right to represent the company, a director has to fulfill several duties.
A statutory director has several duties. In fulfilling duties as a statutory director, one must act in the interest of the company. Duties for example include:
- managing the company;
- keeping the books and records of the company;
- acting as a representative of the company;
- preparing financial reports; and
- filing the annual accounts.
One of the obligations of a statutory director is to draw up and file the annual accounts annually. Within five months of the end of the company’s financial year, the board of directors draws up the annual accounts and makes it available to the shareholders at the company’s office.
The annual accounts must be signed by all the directors. If one or more of the signatures is missing, this must be mentioned, including the reason for it. The shareholders meeting then has to adopt the annual accounts. After this, the annual accounts have to be filed at the Chamber of Commerce (the Kamer van Koophandel/ KvK). This has to be done within eight (8) days of adopting the accounts.
3. What are the risks of being a statutory director of a Dutch B.V.?
Being a director also entails certain risks. As a general rule, a statutory director of a BV is not personally liable for the company’s debts (this is the actual meaning of a limited liability company). However, a statutory director could personally be held liable in certain occasions. A statutory director can be held liable both internally and externally. In the following paragraphs these will be explained in the following order:
- 1 Internal director’s liability
- 1.1. Liability in the case of improper performance of duty according to Article 2:9 of the Dutch Civil Code (DCC):;
- 1.2. Discharge
- 2. External director’s liability
- 2.1. Article 6:162 DCC: liability against third parties in the case of tortious acts;
- 2.2. Article 2:248 DCC: liability in the case of bankruptcy.
- 3. Other notable risks
3.1. Internal director’s liability
Improper performance of duties (2:9 DCC)
Following article 2:9 DCC a statutory director must perform their duties properly. A director is expected to be competent in their task. When duties are not performed properly, a director can be held liable towards the company of which they are a director. This is referred to as internal liability. Internal liability may arise in the case of improper performance of duties
To be held liable on the ground of improper performance of duties, there must be:
- Improper performance of duties by the statutory director; and
- The statutory director can be seriously blamed for this improper performance of duties.
To assess whether there has been improper performance of duties, all relevant circumstances are taken into account. Relevant circumstances according to the Dutch Supreme Court may be:
|The nature of the activities carried out by the company;||The risks generally associated with the activities carried out by the company;|
|The allocation of tasks within the board of directors;||Guidelines that the board is subjected to;|
|The information available to the director at the time of the improper performance of duties;||The insight and care that is expected of a director who is competent in their task and fulfills it properly.|
Minor, everyday mistakes therefore do not constitute improper performance of duties, nor serious blame.
The liability of article 2:9 DCC is collective, which means that when one director of the board performs improperly, all directors are jointly and severally liable. Individual statutory directors can claim exculpation if they are able to prove they were not to blame and there was no negligence on their side in taking measures to avoid the results of the improper performance of duties. It is not possible to claim exculpation solely on the basis that the blame was in a task that was someone else’s.
Examples of situations that may constitute improper performance of duties are:
- Breaching a statutory provision that aims to protect the company;
- Taking unnecessary financial risks;
- Acting in violation of laws;
- Engaging in competition with the company;
- Putting private interests above the interests of the company;
- Executing unauthorized legal actions.
To avoid internal liability it is therefore mainly important to act in the interest of the company and to act accordingly to statutory provisions.
Internal directors’ liability can be avoided by granting discharge to the directors. Discharge means that the policies that a director has pursued up to the time of discharge are approved by the company. This means there is a release from liability for the statutory directors. Discharge is granted by the General Meeting of Shareholders. It is very common in the Netherlands that Discharge is granted by the annual general meeting of shareholders in which the annual accounts are approved as well.
Discharge only applies to facts and circumstances that were known to the shareholders at the time of the discharge. For unknown facts, according to case law, the possibility of internal director’s liability will continue to exist.
3.2. External director’s liability
In certain occasions directors can be held liable by third parties as well. This is referred to as external director’s liability. Statutory directors can externally be held liable
- against third-parties in the case of a tortious act, or
- for the debts of the BV in the case of bankruptcy.
Both will be discussed below.
Tort (article 6:162 DCC)
A director can be held liable by a third party on the basis of a tortious act (article 6:162 DCC).
The Dutch Supreme Court has distinguished two types of cases in which a director can be held liable under tort law: the Beklamel-situation (Supreme Court in 2006) and the Ontvanger/Roelofsen-situation (Supreme Court in 1989). In both cases the norm for deciding whether the director has committed a tortious act is when the statutory director can sufficiently be seriously blamed.
The first possible situation is the Beklamel-situation. The Beklamel-norm is an important norm in Dutch liability law. The Beklamel norm entails that serious personal blame of the director may be assumed when they enter into obligations on behalf of the company when they knew or reasonably should have known (hereinafter this is referred to as objective knowledge) that the company would not be able to meet its obligations against this third party and would not offer any recovery. Following Beklamel there are thus two cumulative criteria for assuming serious personal blame:
- Objective knowledge about the company’s failure to comply with its obligation;
- Objective knowledge about the company not being able to offer any recovery.
When these two criteria are fulfilled, and there are no circumstances argued by the director, based on which the conclusion is justified that the director cannot be seriously blamed personally, the director can be liable against a third party. For third parties it may be hard to prove that a director had objective knowledge that the company would not be able to comply and would not be able to offer any recovery at the time they entered into the obligation. A Beklamel-claim is only filed after it becomes evident that the company can no longer meet its obligations, and, therefore, it is subject to hindsight bias, referring to the tendency to overestimate the foreseeability of an event after it has occurred.
The other situation in which a statutory director can be held liable by a third party is when the director causes or allows the BV to fail to comply with an already concluded agreement and does not offer any recovery (Ontvanger/Roelofsen). In such a situation, the director is liable when the actions or omissions of the director, in relation to the creditor, were so careless in the given circumstances that he can be personally seriously blamed for it.
The Beklamel-situation is often referred to as the sinking ship-situation: the company is on its way to bankruptcy, but a director still enters into agreements. In the last situation (Ontvanger/Roelofsen) the director frustrates recovery and creates breach of contract.
Discharge (see before) does not apply to external director’s liability. It is recommended that a director does not make agreements on behalf of the company when one knows that the company will not be able to fulfill these agreements.
Then finally there is external director’s liability in the case of bankruptcy. External director’s liability in the case of bankruptcy is based on article 2:248 DCC. Article 2:248 DCC can be invoked by a curator. The liability of article 2:248 DCC is collective as well, which means all directors are jointly and severally liable. On the ground of article 2:248 DCC a director can be held liable for the debts of the BV in the case of bankruptcy insofar as they cannot be satisfied from the liquidation of the remaining assets when:
- The board was manifestly improper in the performance of its duties;
- There is reason to suspect that this improper performance was a significant cause of the bankruptcy.
The question that should be asked to determine whether the board was manifestly improper in the performance of its duties is according to case law:
“Would a reasonably thinking director have acted the same way under the same circumstances?”
The most important thing to know about article 2:248 DCC is that according to paragraph 2 of this article a director has irrefutably not fulfilled their task as a director properly, when:
- The obligation to keep the books has been breached (article 2:10 DCC); or
- The obligation to file the annual accounts has been breached (article 2:394 DCC).
When this is the case, there is a legal presumption that this is significant cause of the bankruptcy as well. In other words, to avoid being liable in the case of bankruptcy, it is very important to keep proper books and file the annual accounts every year, complete and on time.
Exculpation is possible when the director is able to prove they were not to blame for the improper performance of duties and there was no negligence on their side in taking measures to avoid the results of the improper performance of duties. Exculpation for the situation of article 2:248 par. 2 DCC, thus the situation of not having proper books or not having filed the annual accounts, however is very hard.
Other examples of situations that may constitute improper performance of duties that may cause liability on the ground of 2:248 DCC are:
- Assisting in fraudulent transactions;
- Unlawfully withdrawing assets from the BV;
- Making agreements, when it could reasonably been known that the BV was not going to be able to fulfill them.
3.3. Other notable risks
Apart from these liability risks, there are other situations in which there can be liability towards third parties as well. For example: following article 2:249 if the annual accounts provide a misleading representation of the BV’s condition, the directors are jointly and severally liable to third parties for the damage suffered as a result (exculpation is possible). The most important and most frequent risks for liability have been discussed.
There are also risks that are not related to directors’ liability. Such a risk could be the borrowing of money from the company. Oftentimes a director, especially a director who owns a majority of the shares and is the sole director of the company (in Dutch ‘directeur-grootaandeelhouder’, or ‘DGA’), will (sometimes even unconsciously) borrow money from the company. For example through bank withdrawals, or by taking some extra money for their management fee. Directors do not always realize that this means they are in debt to the company. This may create a problem if the company is declared bankrupt, or the shares are sold. The curator or new owners will then normally argue that the outstanding debts should be repaid.
A statutory director acts in interest of the company. In principle, the B.V. is liable for all damages (limited liability), however, sometimes a statutory director can be held liable as well. To avoid liability a director must act in a manner a ‘reasonably thinking director’ would. To do this a director should make sure to:
- File the annual accounts on time;
- Keep the books properly;
- Monitor the financials of the B.V.;
- Not enter into agreements the B.V. is not able to fulfill;
- Act in the interest of the B.V.;
- Be transparent about possible conflicts;
- Leave the board meeting when it concerns an item in which the director has a direct or indirect personal interest which conflicts with the B.V.’s interest.
Do you have any questions about being or becoming a statutory director, the structure of a B.V., liability or do you need any advice on related topics? Our team is available to help you.